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Wall Street Blissfully Ignorant Of Fed’s Erdogan Risk
"Let's be honest, Fed independence is a myth."
So said some guy in the sales department (as distinc
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For history buffs: Jimmy Carter – gentle cardigan wearing “nice guy” forced Arthur Burns out of the Fed chair in 1977 because Burns was killing growth. Carter harped on this for months then fired Burns. . He put in G. William Miller. Miller did exactly what Carter wanted. He never raised the Funds rate EVER while inflation climbed, gold climbed, and the equity market went down. AND the world would not even accept dollar based Treasury paper. On November 1, 1978 the U.S. had to borrow in foreign currencies – the frst time since JP Morgan rescued the country in the 1890s. Carter was eventually ‘forced’ to move Miller to Treasury and appoint Paul Volcker. HELL, Carter was not even trying to be King.
Burns wasn’t fired. He was not reappointed when his term ended and subsequently resigned from the board of governors after his chairmanship ended.
So Trump wants more than a “Miller Approach”. And the Fed, in not raising rates under Miller, got seriously behind the curve for which Volcker had to drastically raise rates to tame inflation that ran well into the teens. Now Powell is acting as Miller did.
So are we already behind the curve? My gut tells me we are and the recent retail numbers are higher because of inflation. It seems food prices will increase as demand outstrips farmers’ ability to provide as their labor pool shrinks. Powell would be crucified (may happen anyway) for raising rates, so is he watching the train wreck of higher inflation taking shape?
Investors love eating TACO. Maybe they will eventually get acquainted with driving the Technicolor Bus.
Until then, I’d watch what is said by the ex-US brokers and banks, as it will better reflect the thinking of foreign investors, who are probably the marginal seller. Most US investors have institutional and behavioral reasons to continue holding and buying US assets, excluding HF, some discretionaries, some systematics.
H, how do you think it plays out if Trump installs a lickspittle Fed chair? Rates get cut 250bps on day 1, on day 2 institutional investors decide that holding non-US bonds is a safer bet, day 3 TACO? Or something a bit more slow-moving, holding rates for a month or two just to tranquilise the markets, then cutting while threatening any US institution that refuses to buy bonds?
No, it won’t be a 250bps rate cut “on day 1.” It’d be a 25bps or 50bps cut at the first meeting under the new Chair and then probably a long testing process where he (Trump) monitors who’s saying what in public, who’s voting how on the Committee and so on. Anyone who dissents against cuts would be making themselves a target for removal via some charade like what Trump’s doing to Powell right now. On the bonds, he’d surely insist the Fed buy at the long-end in the event the market tried to push the issue (i.e., in the event there’s a buyers’ strike), so I don’t know what Warsh is thinking by suggesting the Fed’s going to be able to run down SOMA more and faster with a Trump-controlled Committee.